Pensioners’ ties that bind

Industry experts believe the Government’s latest initiative to increase the supply of housing for young families by encouraging pens-ioners to downsize is likely to fail as it will be costly and unattractive for many.

Last week, housing minister Grant Shapps urged councils to encourage pensioners to down-size to rented accomm-odation, without selling their homes, to free up housing stock for families looking for a place to live.

Under the scheme, the council would arrange for elderly people to move into rented accommodation and take responsibility for maintaining and letting their property. The homeowner would then get the profits from the rental income.

A similar voluntary scheme, called the FreeSpace project, has been piloted in the London borough of Redbridge.

Shapps says: “The FreeSpace project in Redbridge shows what could be achieved. Under this scheme, older people will be able to live independently for longer and enjoy more disposable income without selling their home and families will benefit from living in an affordable home.”

But like many initiatives suggested by the housing minister, such as the shared equity scheme FirstBuy, the idea has received a lot of criticism.

Equity release trade body Safe Home Income Plans says the plan would be very expensive to administer. Director general Andrea Rozario says: “These plans raise more questions than answers at present. There is likely to be a huge cost attached to this scheme, not to mention the high level of admin work that will need to be done.”

“I would question is whether there is enough of an incentive there to take up the scheme. Is the prospect of downsizing on its own enough?”

One of the scheme’s main problems is likely to be the reluctance of elderly people to leave their homes. Rozario says: “How many older people will choose to leave their family homes which they are likely to have emotional ties to and move into a smaller property, potentially away from family and friends?”

Proponents of the scheme suggest the idea of moving into a smaller, more manageable property might be an attractive proposition, especially as the council maintains and lets the property on behalf of the homeowner.

However, London & Country associate director of communications David Hollingworth believes this might not be a big enough incentive.

He says: “The broad principle behind it is a sound one. If you are looking at solutions for the lack of affordable housing, it makes sense to be looking at whether the existing stock is being used as effectively as it could be. But what I would question is whether there is enough of an incentive there to take it up? Is the prospect of downsizing on its own enough?”

People who chose to take part in the scheme will have to pay tax on any income received from renting part or all of their property as it will not be possible to offset the cost of the rent paid on the new property.

John Charcol senior technical manager Ray Boulger says: “You would have to pay tax on the rental income coming in while also paying rent on the new property, which is non-tax-deductible. I see no logic in the idea at all and cannot see why people would want to do this.

You can do this anyway, you do not need the council to help. It just seems like another headline-grabbing initiative from the housing minister.”

Emba group sales and marketing director Mike Fitzgerald says any such scheme would have to be well signposted by the Government.

He says: “I think the best approach is to let people know this option is open to them and to take a more proactive approach. We know people will not be forced out of their homes but people should be made aware it is an option.”

But he adds that the Government must look at other measures to solve the housing shortage such as renovating abandoned homes.

He says: “This needs to be part of a multi-pronged attack in order to address the housing shortage, which includes the FirstBuy scheme.”

A further snag in the Government’s plan could be the lack of compatibility with equity-release plans. Taking up the option of moving out of your home to rent it out while you rent a smaller property would effectively bar homeowners from using equity release as a means of releasing capital from their homes. Currently, only one provider allows borrowers to release funds from a property that they are not resident at.

Bower Retirement Services equity release planner Simon Chalk says: “The current state of play is if you vacate your main residence, then that is one of the triggers for having to repay an equity release loan. Therefore, you are looking at a niche market within a niche market.

“There are very few providers who would allow you to have money from them for a house you are not living in. New Life is the only one which will allow this really.”

Recommended

The Treasury select committee wants to question FSA chief executive Hector Sants over evidence he gave the committee regarding the failure of Royal Bank of Scotland before he takes over at the helm of the Prudential Regulation Authority next year. The announcement comes a day after Sants gave evidence to the committee where he admitted […]

Wealth manager Quilter is to be sold to private equity company Bridgepoint, according to owner Morgan Stanley Smith Barney. The company has been sold to Bridgepoint “in partnership” with the Quilter management team, but the terms of the deal have not been disclosed. The sale is expected to complete in the first quarter of 2012. […]

The Government has lost its appeal against a High Court ruling that its decision to lower solar feed-in tariff payments was illegal. The Press Association is reporting that the Court of Appeal rejected energy secretary Chris Huhne’s claim that he had the power to go ahead with the scheme. Earlier this month, Energy Minister Greg […]

European stock markets have fallen today as talks between Greece and its private bondholders stall. European finance ministers are attempting to get Greece’s private creditors to accept a lower rate of interest. The deal is necessary for Greece to receive the bail out funds it needs. At 14.01, the FTSE 100 was down 0.9 per […]

When someone mentions whole of life plans, most people will think of a niche product that serves as an inheritance tax planning tool for high-net-worth clients. And it’s really not surprising they’ve been pigeonholed in that waybecause before the arrival of RDR in 2013, that’s more or less exactly what they were. For advisers thinking […]

Newsletter

Latest from Money Marketing

Ingram will be succeeded by Lord Debden, who was previously Apfa’s chair Former Wealth Management Association chairman Tim Ingram has stepped down as chair of the Personal Investment Management and Financial Advice Association board. According to a Companies House filing, Ingram’s position was terminated as of 19 September. He formally stepped down from his Pimfa […]

Seven firms have joined Fairstone so far this year Two more advice firms are joining consolidator Fairstone, adding seven new advisers and £200m in funds under management. Chartermarque, which is based in Glasgow and London, and Hammett & Petch, based in Milton Keynes and Bracknell, have signed up to Fairstone. Fairstone chief executive Lee Hartley […]